U.S. ECONOMICS: CIBC Quick Take On Fed

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CIBC says to no surprise, the FOMC statement maintained a dovish tilt, leaving the funds rate near zero, and putting off the tapering talk for another day.

CIBC notes recent growth is described as moderate, despite a slowing in housing, and inflation below target. Downside risks to growth have diminished over the past year. It no longer sees bond yields as threatening, having dropped the reference to an undesirable "tightening in financial conditions" that was in the last statement. That's one precondition for tapering to begin, but the Fed still seeks "more evidence" that a pickup will be sustained before its willing to taper bond buying, repeating the need to see ongoing labour market improvement and a move back up in inflation.

CIBC says January would still be a potential first tapering if, as we expect, economic data show improvement around the turn of the year. In saying it will take into account "the efficacy of such purchases", the Fed implies that it needs to see guidance on future policy, and perhaps a pledge to return to QE buying if need be, as sufficient to keep rates in check when tapering begins.

CIBC notes the Fed did not alter its statement that a zero to quarter point funds rate will stay as long as unemployment is above 6.5% and the inflation outlook below 2.5%, but it might become more dovish on that guidance when it does start tapering. Slightly bearish for fixed income, given that the Fed doesn't seem to see a 2.5% 10 year rate as problematic, having dropped the "financial conditions" line.

-- Avery Shenfeld, CIBC WM Economics



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